The agreement between the BBC and ITV to create a cost-cutting regional news partnership has foundered, with both sides unable to decide whether to pilot the proposals.

Manchester and Birmingham are two options for the pilot, which was to follow on from the signed memorandum of understanding that proposed the BBC share newsrooms, studios and news crews with ITV on routine diary stories.

ITV is still undecided about the next move, because it has realised that the eventual savings, of £7m to £8m annually by 2016, will be modest and a long time materialising.

ITN executive David Mannion, the head of ITV News, said: "There are some severe difficulties in finding a way to partner with the BBC. It operates in a pretty old-fashioned way."

Current proposals do not produce the level of savings ITV seeks from changed working practices, crewing, and property savings.

ITV is entangled in leases throughout the regions, and has been hit hard by the collapse in commercial property values.

But a senior BBC executive said the talks had revealed a hidden element of the current ITV system.

"One of the lurking issues is the inseparability of regional and national news. It is a false frontier. Under this deal, BBC picture-gathering can in no way be used to support ITN's national news services. So how do you separate the two?

"While ITV have been very clear about the dire state of their regional news operations, they have been coy about the hidden subsidy they provide to ITV national news and Channel 4.

"Say ITV really exits regional news. How does ITN propose to gather news from across the UK without crews? National news-gathering for it would be dealt a mortal blow. Answer: they would have to acquire pictures from agencies, and agencies charge."

Meanwhile, ITV appears to have shifted its hopes of escaping the regional news burden on to subsidised independently financed news providers, which the final Digital Britain White paper on 16 June, is expected to back, provided £50m public cash can be found.

ITN, in a separate private submission to Digital Britain, said it could manage the consortia.

The Channel 4 news and current affairs controller, Dorothy Byrne, has thrown her weight behind ITN.

"ITN has been a very successful model which I believe people have taken for granted. At a time when people are talking about the importance of partnerships, the ITN model is potentially one to build on and it makes a great deal of sense to consider ITN as a key partner in any future plans for regional news. Through ITN, ITV and Channel 4 achieve economies of scale and work together successfully – for example, we have direct access to ITV regional news. But we also by working together create a journalistic powerhouse which is an important centre for independent television journalism in this country."

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